Sumitomo Trust & Banking confirmed it was considering merging with LTCB after being approached by the embattled Japanese bank earlier this week. Negotiations began yesterday, Sumitomo said, adding that no deadline had been set on reaching an agreement.
Atsushi Takahashi, Sumitomo's president, said: "The authorities have told us they'll give the merger their full support."
The news was broadly welcomed by the market, which saw the development as further evidence of the Japanese government's willingness to face up to the country's continuing financial crisis.
"It appears policy makers are finally biting the bullet on troubled banks," said Michael Scarlatos at Bankers Trust New York. However, analysts were quick to point out that mergers were, on their own, not enough to sort out Japan's banking problems. The market is looking for far-reaching structural reforms to Japan's financial system, analysts said.
The yen steadied at around 142 to the dollar, while the Nikkei closed up 77.82 points at 15,210.04.
LTCB, with assets of around 26.2 trillion yen (pounds 110bn), specialises in making long-term loans to Japanese business. However, revenues from these types of loans have dried up after clients sought cheaper means of financing via the capital markets, threatening the long-term health of LTCB and similar banks.
LTCB is currently struggling with around 1.4 trillion yen of bad debt and has seen its credit ratings cut to just above junk bond level. Its shares have plunged from 300 yen in March to just 50 yen earlier this week. Yesterday its shares rose to 73 yen before being suspended.
Under the terms of the merger deal under discussion, Sumitomo would only take on LTCB's performing debts, with LTCB's bad debts likely to transfer to Japan's new "bridge bank". The bridge bank - which is expected to manage the bad debts of struggling financial institutions - is believed to be a key feature of Japan's eagerly awaited plans for financial reform.
Sumitomo's shares fell on the news by 20 yen to 648 yen before being suspended.
Separately, Dai-Ichi Corporation filed an application with the Tokyo District Court for liquidation, said Japanese media reports. Dai-Ichi, said to have bad debts of 413.5 billion yen, is Japan's 13th-largest failure in the post-war period.Reuse content